Buying Troubled Assets

Tim Geithner's plan to remove toxic assets from the books of crippled financial institutions is receiving mixed reviews. Nobel Prize-winning economist Joseph Stiglitz said the plan "amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer." (Wouldn't you like to see the cage match between outside Democratic genius economist skeptics such as Stiglitz and Paul Krugman and inside Democratic genius economist promoters such as Larry Summers?)

The Geithner plan is designed to benefit professional investors: It provides them with lots of easy credit, limits their losses, and allows them to reap a disproportionate chunk of the benefits if the investments pan out. This will be a boon to outfits such as the Blackstone Group and big hedge funds. But it will not be much of a boon to you, and I don't mean that in the sense that taxpayers are assuming too much liability. I mean that you, and I, and other small-account holders have no easy way to participate in the plan, and that's a shame.

The design of the Geithner plan reinforces the notion that there are two sets of rules in the market, one for the really big players (matching investments, generous loans) and another for small investors and homeowners (expensive bailouts and foreclosure).

If we taxpayers are going to be financing something close to guaranteed returns for hedge funds and private-equity firms, why can't we get in on the sweet deal that's being offered to Wall Street? Why can't we buy the distressed assets the same way hedge funds will? If we think creatively, we can find a way to enable this.

As Matt Yglesias points out, at least part of the Geithner plan envisions the participation of mom-and-pop investors. The fact sheet says that for the "legacy loan" program, the less-leveraged component aimed at encouraging investors to buy loans from banks, "the participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged." But the "legacy securities" program, the more-leveraged version aimed at encouraging investors to buy mortgage-backed securities and other instruments from banks, does not mention allowing individual investors to participate.

Given the size of the assets involved and the structure of the investment-management industry, it's likely that only wealthy institutions and institutions that serve only wealthy individuals—hedge funds, private-equity firms, etc.—will be bidding on these distressed assets. Individual investors generally don't have the tools to analyze the securities and assets for sale. Banks such as Citi will be eager to sell off their junky assets in chunks of $50 million, not in chunks of $5,000. Bailouts and the unwinding of bubbles are necessarily wholesale operations, not retail ones.

But it wouldn't be hard to arrange for small-fry investors to participate in the bailout. The government could partner with investment-management firms—especially well-regarded investment-management firms such as Vanguard and TIAA-CREF—to create mutual-fundlike vehicles in which individuals could invest as little as a few hundred dollars in the effort to stabilize the banking system. The feds could even offer such an investment as a check-off on tax returns. Or we could present it as an allocation choice for federal employees' retirement accounts. Legacy loans and legacy assets could be offered as an option for state-sponsored 529 college savings programs, in which investors typically commit to lengthy holding periods. Or they could be made part of the universal savings accounts that Obama supports.

And if the private-equity or hedge-fund industry had an ounce of PR savvy—a really big if—it would help individuals make similar investments while waiving the management and incentive fees.

Yes, there's risk involved. And there is something circular about this arrangement. We'd be lending money to ourselves to buy stuff that the government would probably end up owning anyway if we didn't buy it. But I'd rather lend my tax dollars to help you, dear reader, profit from the financial disaster than lend them to Blackstone Group CEO Stephen Schwartzman to help him profit from it.